Botswana Lesotho

COUNTRY REPORT

3rd quarter 1998

The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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Contents

3 Summary

Botswana 5 Political structure 6 Economic structure 7 Outlook for 1998-99 9 Review 9 The political scene 12 Economic policy 14 The economy 15 Business and commerce 16 Finance 17 Infrastructure 17 Health 18 Agriculture 18 Mining 19 Foreign trade and payments

Lesotho 21 Political structure 22 Economic structure 23 Outlook for 1998-99 25 Review 25 The political scene 27 The economy

31 Quarterly indicators and trade data

List of tables 9 Botswana: forecast summary 14 Botswana: employees and average earnings by sector, Mar 15 Botswana: migrant workers in South African mines 17 Botswana: comparative telecommunications indicators, 1996 20 Botswana: foreign-exchange movements, 1998 20 Botswana: external debt 24 Lesotho: cereal forecast, 1998/99 29 Lesotho: external debt 31 Botswana: quarterly indicators of economic activity 31 Lesotho: quarterly indicators of economic activity 32 Botswana and Lesotho: UK trade

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List of figures 9 Botswana: gross domestic product 9 Botswana: pula real exchange rate 16 Botswana: stockmarket capitalisation

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June 29th 1998 Summary

3rd quarter 1998

Botswana Outlook for 1998-99: The new president, Festus Mogae, will try to consolidate his position over the coming year. His choice of Ian Khama as vice- president was not welcomed by the main factions of the ruling BDP, but the new leadership is expected to gain rank-and-file support. Although Mr Mogae is expected to face some challenges in the presidential contest in 1999, the main opposition party, the BNF, is so divided that the BDP will almost certainly win the national election that year. Increased government spending ahead of the election is likely to push up inflation in the second half of 1998, yielding an annual average rate of 8.3%. The government may also record a fiscal deficit for the first time for several years, as tax revenue from diamonds falls owing to weak Asian demand. Meanwhile, lower diamond earnings are expected to reduce the current-account surplus over the forecast period and slow real GDP growth to 6% in 1998.

Review: Although President Mogae’s technical expertise on policy is not in doubt, his political skill has been put to the test by the need to reconcile opposing factions within the ruling BDP, and his choice of Mr Khama as vice- president was controversial. Schisms within the opposition BDF have intens- ified, and the government has attracted criticism for its treatment of the Baswara people and for harassing journalists. Relations with Namibia have improved following the opening of the Trans-Kalahari highway. The IMF has praised Botswana’s sound macroeconomic management but has warned against fiscal irresponsibility in the run-up to the 1999 election. The Bank of Botswana, meanwhile, has cautioned against pay rises that are not linked to productivity. Economic growth figures are encouraging, but unemployment is high and rising. Following a strong first quarter, the stock exchange has levelled off. Inflation has begun to creep up, but international reserves remain high.

Lesotho Outlook for 1998-99: The new prime minister, Pakalitha Mosisili, will seek to consolidate his position and assert his independence, while economic policy will remain largely unchanged. The opposition, with only one seat in parliament, will seek other means to exert its influence but will remain marginalised. The outlook for the gold sector, and thus for Basotho miners, is bleak but, despite further redundancies, many workers will stay in South Africa rather than return home. Owing to poor and intermittent rains in 1997/98 associated with El Niño, the cereal harvest will meet only one-third to one-half of the nation’s requirements. High existing stocks and imports will, however, miti- gate the impact on food prices.

Review: The legislative election on May 23rd resulted in a landslide victory for the incumbent LCD, which won 78 of the 79 seats contested and 61% of the popular vote. Observers considered the election generally free and fair, but opposition parties have protested. Mr Mosisili has taken over as prime minister and has named his government: two potential challengers, Kelebone Maope

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and Shakhane Mokhehle, have been persuaded to accept cabinet posts, and Tom Thabane has become foreign affairs minister. Strong average real GDP growth has continued, but 9,000 Basotho miners in South Africa have recently been made redundant. The Highlands Water project has won a vote of confidence from the World Bank, and the privatisation of two state-owned banks has been announced. Growth in the foreign debt stock slowed in 1996, while official development assistance showed a decline.

Editor: Todd Moss All queries: Tel: (44.171) 830 1000 Fax: (44.171) 830 1023

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Botswana

Political structure

Official name Republic of Botswana

Form of state Unitary republic

Legal system Roman-Dutch law; cases in rural areas are heard by customary courts

National legislature National Assembly; 40 members elected by universal suffrage, the president, the attorney-general and four members appointed by the president. A 15-member House of Chiefs advises on tribal matters

National elections October 1994 (legislative); next election due by October 1999 (legislative)

Head of state President, chosen by the National Assembly

National government The president, his appointed vice-president and cabinet

Main political parties Botswana Democratic Party (BDP), the ruling party; Botswana National Front (BNF); Botswana People’s Party (BPP); United Action Party (UAP)

The government President Festus Mogae Vice-president, minister of presidential affairs & public administration Ian Khama

Key ministers Agriculture Ronald Sebago Commerce & industry George Kgoroba Education Gaositwe Chiepe Finance & development planning Ponatshego Kedikilwe Foreign affairs Mompati Merafhe Health Chapson Butale Labour & home affairs Bahiti Temane Local government, lands & housing Daniel Kwelagobe Mineral resources, energy & water affairs Margaret Nasha Works, transport & communications David Magang

Central bank governor Baledzi Gaolathe

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Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997a GDP at market pricesb (P m) 9,126 11,115 12,530 14,631 18,015 Real GDP growthb (%) 4.1 3.1 6.2 7.0 7.0c Consumer price inflation (av; %) 14.3 10.6 10.5 10.1 9.3d Population (m) 1.39 1.42 1.45c 1.48 1.52 Exports fob ($ m) 1,722 1,874 2,160 2,218 2,769 Imports fob ($ m) –1,455 –1,350 –1,579 –1,293 –1,900 Current-account balance ($ m) 503 239 338 609 827 Reserves excl gold ($ bn) 4.2 4.5 4.8 5.1 5.7d Total external debt ($ m) 660 688 703 613 610 External debt-service ratio (paid; %) 3.7 4.1 3.2 4.8 3.0 Diamond production (m carats) 14.7 15.6 16.8 17.7 20.0d Cattle slaughteringse (’000) 181 158 166 140 130 Exchange rate (av; P:$) 2.419 2.683 2.772 3.324 3.651d

June 26th 1998 P4.268:$1

% of % of Origins of gross domestic product 1996bc total Components of gross domestic product 1997bc total Agriculture 3.4 Private consumption 28.4 Mining & quarrying 32.6 Public consumption 26.8 Manufacturing 5.9 Gross fixed capital formation 23.0 Construction 5.1 Change in stocks 2.8 Trade, hotels & restaurants 16.9 Exports of goods & services 56.4 General government 17.3 Imports of goods & services –37.5 GDP at current market prices incl others 100.0 GDP at market prices 100.0

Principal exports fob 1997a $ m Principal imports cif 1996a $ m Diamonds 1,625d Food, beverages & tobacco 350 Vehicles 240 Vehicles & transport equipment 520 Copper-nickel 126 Machinery & electrical goods 450 Beef 81 Chemical & rubber products 150 Total incl others 2,218 Total incl others 1,564

Main destinations of exports 1996f % of total Main origins of imports 1996f % of total EU 74 SACU 78 SACU 21 EU 8 Zimbabwe 3 Zimbabwe 6 a EIU estimates. b Fiscal years ending June 30th. c Official estimates. d Actual. e Years ending September 30th. f January-June.

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Outlook for 1998-99

The new president will The president, Festus Mogae, who took over from Sir Quett Ketumile Masire in seek to consolidate his April, will use the coming year to consolidate his position as leader of the position— ruling Botswana Democratic Party (BDP), in order to ensure his re-election in 1999. His choice of Ian Khama as vice-president caused some consternation within the party, but no group has openly criticised the decision. While Mr Khama is relatively new to politics, his family name and personal connec- tions (his father, Sir Seretse Khama, was Botswana’s first president) have brought strength to the new leadership. Potential challengers within the BDP will continue to manoeuvre in an attempt to mount a leadership bid, but no faction is likely to present a serious threat to the position of either Mr Mogae or Mr Khama. Nevertheless, the president still faces political fissures within the party. While his technocratic background may serve him well on the policy front, internal political wrangling within the BDP is likely to consume his time, unless he is able to placate some of those who have been left out of the new leadership structure.

—and the opposition will Although the new leadership lacks charisma, the BDP is unlikely to face any remain weak and divided real challenge at the next national election in 1999, given that the main opposition party, the Botswana National Front (BNF), has almost disintegrated. There is little chance that the BNF will be able to heal its internal rifts before the deadline for announcing its presidential candidate. Indeed, the party may split before the end of 1998, further weakening the opposition. The BNF leader, Kenneth Koma, has suggested forming a coalition of opposition parties, but this is unlikely to materialise in the near future. The recently formed United Action Party (UAP) may be able to gain some support as the BNF disintegrates, but this will not be sufficient to threaten the BDP. A first test of the UAP’s potential will be the Palaype by-election in July.

Social issues will limit In the absence of effective opposition parties, the BDP is well placed to win the support for the BDP— 1999 election comfortably, although not necessarily with an overwhelming majority. While the government has a commendable record of fiscal prudence and strong economic growth, domestic politics over the next few years are likely to focus on unemployment and poverty. The government’s response to these problems may be a limited expansion of public spending to stimulate employment. Capacity constraints in the civil service have, however, been a problem in the past and many projects are already behind schedule. Unless public-sector projects are carefully targeted and closely integrated with capacity- building programmes, they are unlikely to prove particularly effective in ad- dressing social problems.

—and will hinder In the light of protests from organised labour, the government may also face economic reforms difficulty in implementing economic reforms, such as market liberalisation and privatisation. Such reforms are likely to have at least a short-term negative impact on local jobs and working conditions. For example, the main public- sector workers’ union has already rejected proposals for privatisation of certain public entities outright. In the face of stiff opposition from organised labour,

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the privatisation programme is likely to proceed very slowly, particularly in the run-up to the 1999 election.

A modest fiscal deficit is In view of probable pre-election increases in government expenditure, and possible— expectations that revenue will be squeezed by lower earnings from diamond exports owing to weaker demand in Asia, the government faces the possibility of running a small fiscal deficit in 1999 for the first time for nearly two decades. The EIU forecasts a surplus of P66m ($15.4m) in 1998 followed by a deficit of P84m next year. However, this would neither pose a threat to the real economy nor imply any significant change in the government’s record of sound macroeconomic management. Moreover, thanks to high levels of government sav- ings, financing such a deficit should not present any difficulty.

—and inflation may rise— Increases in government spending and civil service pay rises anticipated in the run-up to the 1999 election are likely to stoke inflationary pressures in late 1998 and 1999. Consumer prices will also rise in line with increases in food prices owing to an expected cereals deficit in 1998 and the rising price of imported goods following the recent depreciation of the pula. From the 6.9% reported in March and 7.3% in April, the EIU forecasts that year-on-year inflation will rise significantly in the last six months of 1998, yielding an average annual rate of 8.3%. Further increases in consumer prices are expected to raise annual average inflation to 9.8% in 1999. This may lead to a small rise in interest rates as the Bank of Botswana (BoB, the central bank) seeks to ensure that inflation is kept below 10%. The bank rate is likely to remain at around 12% throughout the forecast period.

—while the pula will Although the South African rand has recently experienced exchange-rate vola- follow the rand tility, the BoB is unlikely to change the weighting of the rand—currently at downwards around 60%—in the basket of currencies it targets in its exchange-rate policy. The central bank will resist calls for changes to the basket owing to the impor- tance of maintaining export competitiveness in rand-sensitive markets. Given that the rand is expected to depreciate further over the forecast period, a small real depreciation of the pula is also expected. We forecast an average rate of P4.29:$1 in 1998, falling to P5.05:$1 in 1999.

The current account will The continuing financial and economic crisis in South-east Asia is expected to be affected by the Asian dampen demand for Botswanan exports in 1998 and 1999 and adversely affect crisis— diamond earnings. In addition, diamond production is not forecast to increase until the new Orapa mine comes on line in 2000, and a small decrease in dollar earnings from diamond exports is therefore anticipated. The drop may be slightly offset by increased vehicle exports, as the new Hyundai plant in Botswana starts full production and the Swedish car manufacturer Volvo estab- lishes operations in the country. Meanwhile, an increase in imports is expected as a result of higher levels of investment and a rise in government spending before the 1999 election. The current-account surplus is forecast to shrink dramatically, to $313m this year and $126m in 1999.

—and slower economic Our growth forecasts remain unchanged, based on the assumption that lower growth is still expected demand for diamonds will restrain the mining sector’s contribution to GDP

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growth in 1998-99. However, moderate increases in government spending and higher levels of foreign direct investment in manufacturing, and consequently increased output, notably in the vehicle industry, will boost economic expansion in late 1998 and 1999. Average real GDP growth is thus expected to drop to 6% in 1998, recovering to 7% in 1999.

Botswana: forecast summary ($ m unless otherwise indicated) 1996a 1997b 1998c 1999c Real GDP growthd (%) 7.0 7.0e 6.0 7.0 Consumer price inflation (av; %) 10.1 9.3a 8.3 9.8 Merchandise exports fob 2,218 2,769 2,687 2,749 of which: diamonds 1,625 2,050 1,900 1,950 vehicles 240b 280 350 400 copper-nickel 126b 80 95 100 beef 81b 66 85 80 textiles 60b 65 75 80 Merchandise imports fob–1,293 –1,900 –2,200 –2,398 Current-account balance 609 827 313 126 Exchange rate (av; P:$) 3.32 3.65a 4.29 5.05

a Actual. b EIU estimates. c EIU forecasts. d Fiscal years ending June 30th. e Official estimate.

Botswana: gross domestic product (a) Botswana: pula real exchange rate (d) % change, year on year 1990=100 120 7 R:US$ 6 110

5 100 4 90 3

2 80 Botswana 1 P:US$ Africa 70 n/a 0 1995 96 97(b) 98(c) 99(c) Z$:US$ 60 (a) Years ending June 30th. (b) EIU estimates. (c) EIU forecasts. (d) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World 1990 91 92 93 94 95 9697 97 98(c) 98 99(c) 99 Economic Outlook.

Review

The political scene

Mr Mogae settles into the Botswana’s new president, Festus Mogae, is three months into his term, having presidency— taken over from Sir Quett Ketumile Masire, who resigned in March. The new president, a former governor of the Bank of Botswana (BoB, the central bank) and executive director of the IMF, is unlikely to stray from the macroeconomic policies that the ruling Botswana Democratic Party (BDP) has historically followed. His background as a technocrat, however, leaves him without the

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political networks traditionally needed to maintain party support. The choice of Mr Mogae was a signal from the outgoing president that he did not want the BDP to sink into factional politics. Despite this clear endorsement, Mr Mogae has had to make active efforts to appease the BDP’s various factions and maintain party unity. At the same time, the new president has tried to neutralise these factions by appointing an outsider, Ian Khama—a former commander of the Botswana Defence Force (BDF)—to the position of vice-president. At this stage, it appears his strategy has begun to pay dividends, and support for him among members of the party seems to be increasing.

—but his choice of Mr Khama has taken up his responsibilities as acting vice-president, having vice-president is been endorsed by the party caucus, and it seems certain that he will be elected controversial to the parliamentary seat vacated by the former minister of agriculture, Roy Blackbeard, who resigned in May. But Mr Khama’s appointment has not been universally welcomed. Given that he became vice-president on resigning from the BDF, the press has warned that his appointment could set a dangerous precedent by encouraging the politicisation of public servants. Meanwhile, Mr Khama’s appointment has caused dissatisfaction among both main factions of the BDP: the Kwelagobe/Kedikilwe faction and the so-called Big Five group- ing. Both camps had wanted the vice-presidency, and both are likely to put up challengers to Mr Mogae for the party leadership.

Another source of controversy is Mr Khama’s shift from traditional leadership to formal politics. Under Botswana’s constitution, it is not permitted both to stand as a politician and to hold a seat in the House of Chiefs. Mr Khama, who holds a traditional title but not a seat in the House of Chiefs, is adamant that he will not give up his traditional title. The vice-president was excused from his traditional duties while serving in the army, and argues that he can maintain the same arrangement in his new post. Nevertheless, if he takes up a seat in parliament without resigning his traditional role, he will continue to attract criticism. Most urban BDP members do not welcome the trend of traditional leaders moving into the political arena, which they see as potentially threaten- ing to their position and as tainting the image of modern Botswana.

Squabbling within the The main opposition party, the Botswana National Front (BNF), has been un- BNF continues— able to overcome the factional rivalries that have been pulling it apart for the past year (2nd quarter 1998, page 9). The rift between the so-called concerned group, which is slightly left-of-centre and supports the party leader, Kenneth Koma, and the more centre-right Central Committee has deepened in recent months. Earlier this year the Central Committee expelled five members of the “concerned group” and attempted to remove Mr Koma as party leader. Com- mittee members organised a hurried vote with no debate, in which only delegation heads were allowed to participate, but the courts later ruled that the suspension violated the BNF’s constitution. In retaliation, Mr Koma decreed that the Central Committee was dissolved. Again, the courts were asked to rule, and, after an initially inconclusive trial, they eventually ruled in favour of Mr Koma. Although the Central Committee has continued to function, recent events have caused confusion and uncertainty in the party.

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—undermining the party’s The highly public and embarrassing in-fighting suggests that the political credibility credibility of the BNF has been damaged beyond repair. In May two sets of party representatives tried to attend an all-party conference called by the BDP to choose electoral officers—one representing Mr Koma and one representing the dissolved Central Committee. Similarly, confusion has arisen over the party’s candidate for the forthcoming by-election in Palaype, formerly Mr Mogae’s constituency. Two BNF candidates have been named, but it remains unclear who the official candidate will be, effectively removing any chance of mounting an effective challenge to the BDP. There is an outside chance that the BNF will manage to restore some unity at the party congress in July. However, the event is likely to be delayed and the BNF may formally split before the end of the year. Mr Koma has already hinted at such a contingency, suggesting that a broad coalition of parties should co-operate in the 1999 election under the title National Patriotic United Front.

The UAP will fight for Meanwhile, the United Action Party (UAP) faces its first test in the Palaype Palaype by-election in July. The party’s candidate will be Comfort Molowisa, a business- man and hydro-geologist. While the UAP is highly unlikely to win, the party’s leadership will use the by-election as a yardstick by which to gauge national support for the newly formed party (4th quarter 1997, page 9).

Pensions are debated The bill on MPs’ pensions received its second reading in parliament in April. Calls for a 50% gratuity were defeated. The bill provides for a 30% gratuity and a pension on reaching the age of 60, depending on the number of years of parliamentary service and salary level. At the same time, the pension of the former president, Sir Quett Ketumile Masire, was criticised by opposition MPs as too generous (2nd quarter 1998, page 9). However, given that Sir Quett Ketumile has been appointed chairman of an Organisation of African Unity (OAU) panel investigating genocidal crimes in Rwanda, and that he will be remunerated for this post, not receiving his government pension for its dura- tion, the issue will probably not be raised in parliament again.

President Clinton’s visit Following widespread international praise of Botswana’s record of democracy highlights human and human rights during the visit of the US president, Bill Clinton, to the rights issues— country in March, a number of human rights issues have come to the fore. In Botswana, like neighbouring Zimbabwe, homosexuality is a criminal offence. Some human rights groups, spurred by the recent refusal of the prison service to distribute condoms to inmates, are calling for the legalisation of homosexuality, while traditional leaders have come out strongly against any such move. Given the cultural and political sensitivity of the issue, no action is likely. The government is also unlikely to exploit the issue for domestic political purposes, as Zimbabwe’s president, Robert Mugabe, has done recently.

The government continues to face charges of discrimination against minority groups, most recently over its forced resettlement of the Basarwa people living in the Central Kalahari Game Reserve. The Basarwa claim the land on the grounds of ancestral rights and pre-independence British promises. The government counters that the resettlement programme, which started in May 1997, is necessary in order to provide access to social amenities such as sanita- tion and clinics. The First Peoples of the Kalahari (FPK), a Basarwa organisation,

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has received widespread support from other non-governmental organisations in its opposition to the government’s policies. The FPK has been unsuccessful in its efforts to discuss its cause with a cabinet minister, but the outgoing president did visit the Basarwa to listen to their grievances. It remains to be seen whether this visit will have any impact on government policy.

—and the government is The government demonstrated further concern over its international reputa- accused of intimidating tion by dropping criminal charges against Caitlin Davies, a British journalist, in journalists May. Mrs Davies, who is married to a Botswanan national and has been editor of the Maun-based Okavango Observer since September 1995, published a story claiming that a gang of youths were terrorising Maun. In January 1996, after having written several articles on government policy towards the Basarwa, Mrs Davis and another reporter were questioned by the police over the gang article. Both were charged with “spreading false rumours likely to cause alarm”, an offence under the penal code that had never been used before. Press freedom groups claimed that the case was an attempt to intimidate journalists and warn them against criticising the government. The two journalists received international support. On May 25th the charges against Mrs Davies and her colleague were dropped owing to lack of evidence. Media freedom groups, such as the Media Institute of Southern Africa (MISA), believe that the case has set a worrying precedent vis-à-vis government harassment of journalists.

Relations with Namibia The recent opening of the Trans-Kalahari highway, a Southern African devel- are improving opment initiative linking the Mozambican capital, Mapoto, to Walvis Bay in Namibia via South Africa and Botswana, appears to have reminded Namibia and Botswana of the close links between their economies and of the impor- tance of healthy political relations. Perhaps with the opening of this transport- ation link in mind, bilateral relations between the two countries have improved, and steps have been taken to try to resolve their dispute over the islands of Sedudu (Kasikili) and Situngu on their common border (2nd quarter 1998, page 10). A joint commission has been established, and in early May the two sides initialled an accord binding them to a diplomatic solution. However, Botswana has failed to remove its troops from the disputed area, claiming they are needed to prevent poaching. The rhetorical assurances of mutual interest in a peaceful settlement of the issue are also somewhat undermined by the fact that Botswana is expecting delivery of the first consignment of 20 light tanks ordered from Austria.

Economic policy

The IMF praises sound On concluding the annual Article IV consultation in March, the IMF praised macroeconomic the government’s sound macroeconomic policies and its sustainable use of management— mineral resources. Unsurprisingly, however, the team also warned of the dan- gers of Botswana’s reliance on the mining sector and emphasised the need for economic diversification. The Fund cautioned against politically motivated frontloading of projects under the Eighth National Development Plan (NDP 8) prior to the national election in 1999. Concerns focused on the government’s low implementation capacity, largely the result of a public-sector skills defi- ciency, which has hampered projects in the past. While the IMF team advised

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the government to resist indulging in unwarranted fiscal expansion, they did suggest there was more scope for government expenditure on individual projects focused on poverty reduction, employment generation and economic diversification.

The IMF also praised Botswana’s stable monetary policy, notably the maintenance of the link between the South African rand and the pula, which has become increasingly controversial in Botswana over recent months as the rand has plummeted against major international currencies. The maintenance of positive real interest rates was welcomed, but the IMF pointed to the need to broaden and deepen Botswana’s financial markets, and in particular the need to reduce dependence on Bank of Botswana certificates for liquidity management.

—while the central bank In May the governor of the central bank, Baledzi Gaolathe, appealed for wage warns against excessive restraint, and the BoB warned of a possible fiscal deficit if public-sector pay pay rises remains unchecked. The governor appealed for pay increases to be linked to productivity. The BoB has also made it clear that it will not change the current exchange-rate policy of tracking the rand. Although the rand, and thus the pula, has depreciated against major international currencies since 1996, the majority of Botswana’s non-diamond trade is with South Africa. If the link is broken, it could endanger the competitiveness of Botswana’s non-traditional exports, on which it is pinning its hopes for diversified economic growth.

Corruption is reported to The government has come out well in a study discussed in the March issue of be low Finance and Development, an IMF and World Bank quarterly publication. It cites a survey on the effects of official corruption, which suggests that bribery is less common in Botswana than in many industrialised countries. The report also attributes Botswana’s low levels of bribery to the early adoption of sound economic and public-sector management policies, rather than to the work of a more recently established anti-corruption unit.

The BEDIA board is named As part of its drive towards economic diversification, the government has trans- formed the Department of Trade and Investment Promotion into a statutory body. This led to the launch of the Botswana Export and Development and Investment Authority (BEDIA), whose board members—drawn from the private sector and government—were named in May. The government hopes that the new body will be more flexible and dynamic in promoting local and foreign direct investment. An investor services centre, intended as a one-stop investment centre, is expected to be established within BEDIA either later this year or in 1999.

A tax amnesty is The government has continued to try to improve its fiscal performance announced through increasing efficiency in revenue collection. The Department of Taxes has embarked on a nationwide tax amnesty, with the aim of reducing tax evasion by encouraging individuals and companies to come forward and put their tax records in order. The department has decided to waive all interest on tax arrears if they are paid before March 31st 1999. A publicity campaign has been launched to assure people that they will not be penalised if they come forward.

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The economy

Data on economic growth Recently released figures from the World Bank show that the Botswanan eco- are encouraging— nomy was the fastest-growing in the world between 1965 and 1996, with GNP expanding by an average of 13% per year and income per head growing by an average of 9.2% over the 31-year period. Meanwhile, the BoB has released figures for real GDP growth for fiscal year 1996/97 (July-June), confirming that economic expansion reached 7%. Initial indications are that growth was broad- based, but was led by a 7.5% improvement in the non-mining sector. The African Development Bank (AfDB), in its latest annual review, forecasts that Botswana’s economy will grow by an average of 6.5% in real terms over the next five years, a target which the EIU considers attainable.

—but other statistics are Botswana’s Central Statistics Office (CSO) released more sobering data in May sobering— which indicate that average incomes remain low throughout the country with nearly one-quarter of the population earning less than P200 ($45) per month and only 10% of the population earning more than P2,000 per month. Unsurprisingly, women are worse off, with less than 10% of women earning over P1,500 ($340) per month, compared with about 20% of the economically active male population.

More worrying still is the fact that unemployment rose to 35% in June 1997, a 10% increase since 1994. The number of jobs increased by 1,850, a year-on-year rise of just 1.3%. In the context of population growth of 3% per year and annual real GDP growth of 7%, it is apparent that rising unemployment is one of the most pressing issues facing the government, which is not without the financial resources to address the issue.

Botswana: employees and average earnings by sector, Mar

Employees Average earnings per person (P) 1996 1997 % change 1996 1997 % change Agriculture 4,523 4,482 0.9 320 333 4.1 Mining 8,350 8,385 0.4 1,626 1,658 2.0 Manufacturing 23,683 23,983 1.3 765 776 1.4 Water & electricity 2,671 2,817 5.5 1,512 2,051 3.6 Construction 22,555 23,153 2.7 825 940 1.4 Commerce 45,744 46,114 0.8 720 757 5.1 Transport 8,781 9,062 3.2 1,320 1,348 2.1 Finance 17,588 17,729 0.8 1,734 1,691 –2.5 Community services 9,846 9,940 1.0 1,026 1,218 18.7 Education 3,957 3,880 –1.9 2,473 2,729 10.4 Total private & parastatal 147,698 149,547 1.3 – – – Private 133,980 135,760 1.3 957 990 3.4 Parastatal 13,718 13,787 0.5 1,773 1,928 8.7 Central government 70,077 71,488 2.0 1,190 1,244 4.5 Local government 16,341 16,555 1.3 973 994 2.1 All sectors 234,116 237,550a 1.5 1,076 1,121 4.1 a Does not sum in source.

Source: Botswana Central Statistics Office (CSO).

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Botswana 15

—and the issue of job The announcement that the South Korean car manufacturer Hyundai is to shed losses is becoming 450 jobs in its semi-knocked down (SKD) plant, which partially assembles cars, intensely political caused an uproar in Botswana. Although more than 1,200 jobs will be created in the new completely knocked down (CKD) plant, which wholly assembles cars and is to take over several production lines from the SKD plant, many of the redundant SKD workers will not be hired by the new plant, as the work requires different skill levels. The workers have accused Hyundai of hiring excessive numbers of people in order to take advantage of the ten-year tax holiday offered by the government, and then dumping them.

Botswana looks to Botswana has also appealed for regional co-operation on unemployment, partic- regional solutions for ularly with regard to migrant workers in the South African gold-mining industry unemployed miners who have been made redundant (2nd quarter 1998, page 15). To cope with the increasing number of unemployed migrant workers returning to Botswana, the government has sought a joint initiative with the Mineworkers’ Development Agency (MDA), an affiliate of the National Union of Mineworkers (NUM) in South Africa. The MDA has been involved in reskilling and rural development projects in Lesotho and areas of South Africa, and the government hopes to set up similar projects in Botswana.

Botswana: migrant workers in South African mines (’000) 1990 1991 1992 1993 1994 1995 1996 Recruitment 14,627 14,263 13,021 18,134 11,301 9,025 4,277 Total employed 16,893 15,614 13,399 13,166 12,342 12,746 12,983 Source: Botswana CSO.

Inflation takes an March saw a continuation of the downward trend in inflation, as year-on-year upward turn consumer price inflation dropped to 6.9% from 10.8% in December 1995. In April, however, annual consumer price rises reached 7.3%. The increase was largely due to a 15% increase in rental costs by the Botswana Housing Corporation (BHC), as well as to higher alcohol and tobacco prices. (Housing, alcohol and tobacco account for 26% of the total inflation basket weight.) Local analysts have suggested that this was a temporary rise and expect the downward trend to have resumed in May in line with a fall in the annual rate of inflation in South Africa, to 5%. The EIU forecasts that inflation will fall over the next few months and does not expect an immediate change in BoB monetary policy. However, owing to higher levels of government spending and the depreciation of the rand and the pula, we expect inflation to rise slightly in late 1998 and 1999 (see Outlook for 1998-99).

Business and commerce

Small businesses face A study by the Botswana Institute for Development Policy Analysis (BIDPA) has capital shortages shown that a lack of working capital is the major constraint on small business expansion in the country. This has several policy implications, the most important of which is the need to bring finance to existing enterprises—in contrast to new businesses which require seed capital—which are considered too risky by the mainstream banks. The study also implies that financial assistance should be targeted at short-term working capital rather than at longer-term investment.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 16 Botswana

The government is criticised in the report for the long payment delays faced by many local companies, which in some cases have led to bankruptcy.

South African operators Recent unconfirmed reports that radical Afrikaner groups are deterring tourists threaten the local tourism in the Chobe area—reportedly a factor in the cancellation of a visit to the region industry by the Zambian president, Frederick Chiluba—have overshadowed the more serious threat posed to Botswana’s tourism industry by the operations of unli- censed South African tour operators. Tourism is Botswana’s third-largest foreign- exchange earner after diamonds and the automotive industry. Local industry representatives claim illegal operators are costing the country millions of pula in lost revenue and undermining the government’s low-impact tourism policy.

The solar hearing aid wins Botswana has received the annual International Design for Technology award, an award sponsored by the South African Bureau of Standards, for a solar-rechargeable hearing aid. Developed by the Botswana Technology Centre, the hearing aid will be made by disabled adults in Botswana and marketed globally as Solaraid. The product, which harnesses four hours of the sun’s energy to power the hearing aid for a week, will cost about $60 and has already been exported to ten countries.

Finance

The BSE levels off The Botswana Stock Exchange (BSE) saw increased activity throughout the second quarter. Domestic capitalisation rose steadily, passing the P3bn ($775m) mark on April 30th and finishing May at P3.16bn, compared with Botswana: stockmarket P1.45bn pula in May 1997. The value of shares traded also rose substantially in capitalisation (a) the year to May, reaching P115m, or 53% of the total traded in 1997. $ m 900 800 Like other African stockmarkets, the BSE seems to have been largely unaffected 12 700 by the South-east Asian economic and financial crisis, and saw strong growth 600 12 where other emerging-market indices were tumbling. The BSE’s domestic com- 500 panies index (DCI) climbed from 810 in late March to 960 in mid-May, before 400 12 11 falling gradually, to 949, by June 26th. As in the past, bank and brewery stock 300 12 11 200 9 11 were the best performers, although Botswana Insurance Holding also per- 100 formed well. Nevertheless, analysts have expressed some uncertainty about 0 future movements in prices, especially in view of the falling South African rand 1991 92 93 94 95 96 97 98(b) (a) Domestic sector companies only, the number of and falls on the Johannesburg Stock Exchange (JSE). The foreign companies which are displayed on the bars. Does not include cross-listings. (b) May 15th. index (FCI) was more directly affected by negative movements on the JSE, Sources: International Finance Corporation; Botswana Stock Exchange. rising from 292 on March 20th to 330 on June 5th, but slipping to 293 on June 26th.

An international In May the Botswana Development Corporation appointed ICC Bank of Ireland investment centre is as project manager for the development of an International Financial Services under way Centre (IFSC), in the hope of establishing Botswana as an offshore financial conduit for funds into Southern African Development Community (SADC) member states. ICC will be responsible for setting up the regulatory framework governing the IFSC, developing various financial products and marketing Botswana overseas as an international financial hub. Implementation is likely to take at least two years.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Botswana 17

Infrastructure

The telecommunications Vista Cellular launched its commercial cellular phone operation in Botswana network is expanded in May, with a GSM 900 system delivered by Ericsson of Sweden. Ericsson has also provided the infrastructure for Vista’s competitor, Mascom Wireless, which quickly began limited operations before the visit of the US president in March. By the end of 1998 most main towns and some tourist sites are expected to be served by the cellular network. As part of its aim of extending its communications network as far as possible, Botswana Telecom has awarded a P2m ($468,000) contract to a South Africa-based company, ATIO Corporation, to install a voice-mail and fax system. This will enable people without their own telephone to dial into a central voice-mail box (from a public telephone) and send or receive voice-mail messages and faxes.

Botswana: comparative telecommunications indicators, 1996

Botswana South Africa Namibia Zimbabwe Ghana Telephones per 1,000 people 48 100 54 15 4 In largest city 180 495 253 60 17 Waiting time for new telephone line (years) 1.0 0.6 0.7 7.2 2.9 Cost of local 3-minute call ($) 0.03 0.09 n/a 0.03 0.08 Source: World Bank.

South African broadcasts The South African Broadcasting Company (SABC) has ordered Botswana to are severed stop broadcasting its programmes. Owing to Botswana’s proximity to South Africa, the latter’s stations are easy to receive, and during the apartheid years the SABC welcomed the chance to extend its reach. Since 1994, however, SABC has been trying to prevent illegal signal boosting in Botswana by a company that rents and sells televisions. The recent blackout of SABC will boost subscrip- tions to private television stations, such as South Africa’s M-net, and will help Botswana’s own television station, which is due to be launched later this year.

Botswana can also look forward to greater choice in its radio programmes in 1999, as the Botswana Telecommunications Authority is now accepting ten- ders for commercial FM licences. It is not yet clear how many commercial radio licences will be issued.

Regional electricity cuts Botswana’s vulnerability to difficulties in the power sectors of nearby countries affect Botswana was highlighted when a fault on the Bindura-Cahora Bassa line between Zimbabwe and Mozambique caused a loss of power on the regional grid on May 4th. Zambia and Zimbabwe, situated in the centre of the grid, were the worst-affected countries, but Botswana also suffered a short blackout.

Health

Health indicators are The 1998 edition of State of the World’s Children, published by Unicef, suggests improving according to there has been an improvement in the health of children in Botswana. The the UN— mortality rate for children under 5 dropped from 170 per 1,000 in 1966 to 50 per 1,000 in 1996; the average for Sub-Saharan Africa remains at 170. Within the SADC, Botswana ranks second only to Mauritius in this category. At 8%—

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 18 Botswana

compared with a Sub-Saharan African average of 16%—Botswana has the lowest proportion of children born under weight (less than 2,500 grams) in the SADC. Life expectancy in Botswana currently averages 52 years, compared with 71 in Mauritius and only 41 in Malawi.

—but the incidence of A report released by the UN in June claims that in Botswana and Zimbabwe one HIV/AIDS remains adult in four is infected with HIV, the virus that leads to AIDS—the highest alarming rates in the study. It also claims that 21m of the 30m people worldwide infected with HIV live in Sub-Saharan Africa, with at least 13 African countries having infection rates of over 10% of the population. For Botswana, the economic and social implications of the high rate of infection are only just beginning to emerge, but already include higher healthcare costs (2nd quarter 1998, page 18) and will exacerbate the shortage of skilled labour.

Agriculture

Weather conditions Preliminary estimates from the National Early Warning Unit (NEWU) suggest affect crops that dry weather conditions and high temperatures associated with the El Niño oceanic current have adversely affected crop yields for the 1997/98 harvest. NEWU forecasts a cereal shortfall of 95,000 tonnes, but expects this to be covered by commercial imports. There is concern, however, that supply shortages will push prices for basic food and feedstuffs upwards. Livestock are also likely to be affected by the adverse weather conditions, as vegetation dries prematurely leaving cattle with little nourishment during the dry season.

Mining

Debswana announces its Debswana, the Botswana arm of the South African diamond multinational, 1997 results De Beers, has released its 1997 annual report, according to which it sold 20m carats in 1997, up 13% from 17.7m carats in 1996. This yielded net income of P6bn ($1.6bn). Although production in the country increased, sales of rough diamonds though the London-based Central Selling Organisation (CSO) for De Beers dropped by 4% in dollar terms, to $4.6bn. The reduction in global earnings is due to the downturn in Asian economies, particularly Japan, where demand dropped by 9%. De Beers has since reported that sales of rough diamonds fell by 41% in the first half of 1998. Nevertheless, Debswana, which currently accounts for about one-third of Botswana’s GDP, estimates that its new Orapa expansion project will enable it to increase its contribution to GDP to nearly 40%. The Orapa project has set a goal of doubling annual mining output from 6m carats to 12m carats, boosting Botswana’s total production to an estimated 25m carats per year.

A fifth mine is expected— Diamond production will increase even further if a fifth diamond mine is opened at Gope in the Central Kalahari Game Reserve. A 13-month feasibility study on the area is due to be completed in September. The mine is to be open cast, covering an area of 2,000 km. It is not yet clear how many carats will be mined.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Botswana 19

—and the new mining Full details of Botswana’s new Mines and Minerals Act were unveiled at the code is officially 1998 Multilateral Investment Guarantee Agency (MIGA) global mining invest- announced ment symposium in Montreal, Canada, in May. Once implemented, the act will replace the existing 1977 act; it is designed to facilitate exploration of Botswana’s non-diamond mineral resources.

The government will reduce the terms of its participation. Whereas previously it was entitled to 15-25% of equity without capital input, the government will now be entitled to acquire up to 15% of equity, based on the state paying a pro rata share of costs. (More than 15% can be acquired if both parties agree.) Income tax will be charged according to annual profits, at a minimum of 25% and a maximum of 55%, to encourage potentially less profitable ventures and ease concerns about the revenue implications of changes in international prices. Diamond-tax rates are not affected by the new regulations. Companies will also be able to write off 100% of capital exploration and development costs immediately.

The act also aims to make the process of awarding, renewing and transferring licences more transparent. In the same spirit, it will introduce a retention licence (for two periods of three years, with exclusive rights in the first period and limited rights in the second), giving rights over a mineral discovery which is not exploited at the time owing to unfavourable market prices.

Foreign trade and payments

Progress is made on trade According to a World Trade Organisation (WTO) review of the Southern African liberalisation Customs Union (SACU), which comprises Botswana, Lesotho, Namibia, South Africa and Swaziland, progress is being made on reducing protectionist policies in the region. However, it has been reported that some WTO members expressed concern that the SACU tariff structure, which is most heavily influenced by South Africa, may not be appropriate to the smaller member states. A statement from Botswana’s Ministry of Commerce and Industry indicated that laws governing copyright protection and competition would be brought before parliament in 1998 as part of the steps necessary to comply with WTO rules. The competition bill is expected to remove most government controls on local markets and open them up to international competition in such politically sensitive areas as transport. Meanwhile, progress on ratification of the Southern African Development Community (SADC) trade protocol has been slow. Botswana ratified the agreement late last year; only three other countries in the 14-member SADC (Tanzania, Mauritius and Zimbabwe) have done so.

International reserves In the annual Bank of Botswana (BoB) press seminar, prior to the release of its remain high annual report, the central bank governor, Baledzi Goalathe, reported earnings of P1.5bn ($400m) in 1997, a 40% increase on 1996. He also reported an increase in international reserves from P19.1bn to P21.6bn, and an improvement in the balance-of-payments surplus from P1.65bn to P2.4bn. In line with the falling South African rand, which the BoB targets as part of its exchange-rate policy, the pula fell against major international currencies, including the US dollar. The exchange rate stood at P4.27:$1 on June 26th 1998, down from P3.86:$1 on March 27th.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 20 Botswana

Botswana: foreign-exchange movements, 1998

Mar 27th Jun 26th Pula:US dollar 3.86 4.27 Pula:£ sterling 6.51 7.10 Pula:D-mark 2.12 2.36 Source: Financial Times.

New World Bank data The 1998 edition of the World Bank’s Global Development Finance (GDF) points shed light on the debt to some changes in Botswana’s historical debt figures. While the total external portfolio debt stock remains low, at 12.9% of GNP in 1996 with a debt-service ratio of just 4.8%, figures for the total external debt in 1994-95 have been revised upwards to $688m and $703m respectively, from $676m and $699m previously reported. More importantly, there have been some changes to the historical series for principal arrears. The 1997 GDF showed principal arrears rising from $2.7m at the end of 1990 to $19.3m at the end of 1995. These figures have been a source of contention between the World Bank and the Botswanan authorities, which claim that the country is not in arrears. Al- though the opposing claims are probably due to definitional differences, the national authorities will be relieved that the World Bank now shows arrears decreasing to $8.9m in 1995, before dropping to zero in 1996.

Botswana: external debt ($ m unless otherwise indicated; debt stocks as at year-end) 1994 1995 1996 Total external debt 688 703 613 Long-term debta 677 692 607 Short-term debt 11 10 6 of which: interest arrears on long-term debt 8 6 0 Use of IMF credit 0 0 0 Public & publicly guaranteed long-term debta 677 692 607 Official creditors 627 646 571 Multilateral 497 485 432 Bilateral 130 160 139 Private creditors 50 47 36 of which: commercial banks 42 40 33 Total debt service 93 93 150 Ratios Total external debt/GNP 16.9 15.4 12.9 Debt-service ratiob 4.1 3.2 4.8 Short-term debt/total external debt 1.6 1.5 1.0 Concessional long-term loans/long-term debta 43.1 48.8 52.8 Variable rate long-term debt/long-term loansa 16.3 15.3 14.4

a Long-term debt is defined as having an original maturity of more than one year. b Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance, 1998.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Lesotho 21

Lesotho

Political structure

Official name Kingdom of Lesotho

Form of state Monarchy

Legal system Based on Roman-Dutch law

National legislature Bicameral National Assembly elected according to the terms of the 1993 constitution; 80 elected members in the lower house; 33 non-elected members in the upper house (Senate), 11 nominated by the king on the advice of the prime minister, plus the 22 principal chiefs of Lesotho

National elections May 1998 (legislative); next due March 2003

Head of state Monarch, succession governed by custom; King Letsie III sworn in on February 7th 1996, crowned on October 31st 1997

National government Prime minister and a 16-member cabinet, last reshuffled in June 1998

Main political parties Party political organisation was legalised in May 1991 and the main parties include: the Lesotho Congress for Democracy (LCD, the ruling party); the Basotholand Congress Party (BCP); the Basotho National Party (BNP); the Marematlou Freedom Party (MFP); Kopanang Basotho Party (KBP); the Popular Front for Democracy (PFD); the Progressive National Party (PNP); the Lesotho Labour Party (LLP); the Communist Party of Lesotho (CPL)

The government Prime minister, defence & public services Pakalitha Mosisili Deputy prime minister, agriculture, co-operatives & land reclamation Kelebone Maope

Key ministers Communications Nyane Mphafi Education Lesao Lehohla Employment & labour Notsi Molopo Environment, women & youth affairs Mamoshebi Kabi Finance & development planning Victor Ketso Foreign affairs Tom Thabane Health & social welfare Vova Bulane Industry, trade & marketing Mpho Malie Justice, human rights, law, constitutional affairs & rehabilitation Sephiri Motanyane Local government & home affairs Mopshatla Mabitle Natural resources Monyane Moleleki Prime minister’s office Salomone Moerane Tourism, sports & culture Hlalele Motaung Works & transport Shakhane Mokhehle

Central Bank governor Anthony Maruping

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 22 Lesotho

Economic structure

Economic indicators 1993 1994 1995 1996a 1997a GDP at market pricesb (M m) 2,286.2 2,694.4 3,088.5c 3,499.4c 4,438.8 Real GDP growthb (%) 5.6 11.9 9.8c 10.0c 10.5 Consumer price inflation (av; %) 13.1 7.1 9.2c 9.3c 11.0 Population (m) 1.94 2.00 2.05 2.11 2.15 Exports fob ($ m) 134 144 160 191 200 Imports fob ($ m) 868 810 850 860 880 Current-account balance ($ m) 29 108 140a 55 20 Reserves excl gold (year-end; $ m) 252.7 372.6 456.7 460.5d 600 Total external debt ($ m) 530 603 659 654d 680 External debt-service ratio, paid (%) 5.3 5.3 6.9 6.1d 5.0 Migrant miners (’000) 116.2 112.7 103.7 101.2 91.5 Exchange rate (av; M:$) 3.264 3.551 3.627 4.271d 4.608d

June 29th 1998 M5.875:$1

Origins of gross domestic product 1995bc % of total Components of gross domestic product 1996bc % of total Agriculture 10.1 Private consumption 85.1 Industry 55.5 Public consumption 16.6 Manufacturing 18.1 Gross domestic investment 89.3 Services 34.4 Exports of goods & services 25.5 GDP at factor cost 100.0 Imports of goods & services –116.5 GDP at market prices 100.0

Principal exports fob 1996 $ m Principal imports cif 1995 $ m Manufactures 171 Capital goods 368 Food & live animals 7 Food 328 Wool & mohair 7 Fuel & energy 216 Total incl others 191 Total incl others 1,168

Main destinations of exports 1996 % of total Main origins of imports 1994c % of total Southern African Customs Union 66.3 Southern African Customs Union 81.8 North America 25.5 Asia 13.1 EU 4.0 EU 2.7 a EIU estimates. b Fiscal years starting April 1st. c Official estimates. d Actual.

Outlook for 1998-99

The new prime minister Following the comfortable victory recorded by the Lesotho Congress for Democracy will assert his (LCD) at the legislative election on May 23rd, Pakalitha Mosisili was sworn in as independence— prime minister on May 29th, the third civilian to head the government in Lesotho since independence in 1966. However, as head of the year-old party created by his predecessor, Ntsu Mokhehle, Mr Mosisili will face political obstacles in his efforts to consolidate his leadership. Unlike his predecessor, Mr Mosisili is a relative newcomer to politics, and his most important asset is Mr Mokhehle’s support. The former leader has already demonstrated his will- ingness and ability to apply pressure on the LCD to ensure that Mr Mosisili has the backing he needs to govern effectively. The new prime minister is regarded as intelligent and quietly effective, and was the de facto leader for much of the last 12 months, as Mr Mokhehle’s health declined. He will, however, have to assert his independence and flex his politic muscle if the new administration is to make an impact on the political scene.

—and opposition parties The LCD’s second successive electoral landslide does, however, have the poten- will seek a role tial to undermine Lesotho’s democracy in the eyes of significant segments of the population. Opposition parties, which appear genuinely surprised at their poor showing at the ballot box, will look to other means to exert their influence. Some will continue to protest against the election results, but a sustained challenge is likely to prove impossible given the broadly favourable conclu- sions of local and international election observers.

While extra-parliamentary protest is unlikely to cause the new government significant problems in the short term, the opposition will soon start to focus on further electoral reforms, including public funding of parties and limiting the privileges of the ruling party. Some of the smaller parties have already indicated a desire to debate the merits of shifting to a system of proportional representation. Overall, however, the opposition parties, which will continue to try to organise themselves around personalities rather than policy issues, will remain marginalised.

The new government will No major shifts in Lesotho’s economic policy are expected, and several of the make few policy changes— cabinet ministers are holdovers from the previous government. In any case, the country’s economic policies are largely driven by exogenous factors. The IMF and World Bank are heavily involved in fiscal and monetary affairs, and Lesotho’s economy is largely dependent on South African trade, investment and largesse.

—but the fate of returning The recent downward trend in the employment of Basotho migrants in South miners will require African gold mines is set to continue for the foreseeable future. The government attention will look to increase co-operation with the mining companies and the South African authorities in order to minimise the economic and social impact of the decline. Mining unions fear that a further 30,000 Basotho may eventually lose their jobs, out of total mining redundancies of 100,000 in South Africa.

Although such large cuts are unlikely, even smaller numbers will have significant and sustained effects in Lesotho, given that many extended households depend on these incomes. Discretionary remittances may not drop as far as feared, however, as an increasing number of Basotho have taken up permanent residence in South Africa, where it is easier to find alternative employment.

The outlook for the The latest Southern African Development Community (SADC) forecasts for agricultural sector 1998/99 confirm that the cereal harvest in Lesotho will be one of the poorest is grim— in the subregion, with an expected total shortfall of about 253,000 tonnes. The reduced crop is attributed to lower rainfall levels and unusual rainfall patterns associated with El Niño; the latest forecast is more pessimistic than earlier projections. Owing to adverse weather and delayed planting, the total area under cultivation is expected to be down by an estimated 70% from 1997/98 levels. Maize output is projected to fall by 65%, to 50,000 tonnes, leaving a deficit of nearly 200,000 tonnes. The wheat and sorghum harvest has not been as badly affected, with production expected to total 56,000 tonnes and 25,000 tonnes respectively.

Lesotho: cereal forecast, 1998/99a (tonnes unless otherwise indicated) Sorghum/ Total Maize Wheat millet cereals Annual requirement 246,000 93,000 45,000 384,000 Projected production 50,000 56,000 25,000 131,000 Projected deficit 196,000 37,000 20,000 253,000 Deficit/requirement (%) 79.7 39.8 44.4 65.9

a Marketing year, April-March.

Source: SADC Food Security Programme.

—but the impact on prices Two factors will offset the impact of the cereals shortfall on Lesotho’s food and supply will be limited supply and average food prices. First, final production figures for 1997/98 were 50% higher than initially expected, with the total gross harvest estimated at 205,000 tonnes, including 142,000 tonnes of maize (nearly three-quarters of this year’s anticipated deficit). Second, the programme of importation is already under way with about 70% of anticipated contracts executed or commit- ted. In June the Japanese government announced that it will provide M10m ($1.7m) to Lesotho for food productivity improvement programmes.

Relations with South Lesotho will work to develop closer ties with South Africa and will push for Africa are set to improve commitments on Phases 2-5 of the Highlands Water scheme, which is coming under increasing criticism. The government will also seek to co-operate with South Africa in formulating a reaction to emerging regional trade rel- ationships, including the possible absorption of the Southern African Customs Union (SACU) into the wider SADC.

Review

The political scene

A resounding victory for The ruling Lesotho Congress for Democracy (LCD), under its new leader, the LCD— Pakalitha Mosisili, won a decisive victory at the legislative election on May 23rd, taking 78 of the 79 contested seats in the National Assembly (the poll in the seat of Moyeni has been postponed for three months following the death of one of the candidates on the eve of the election). Returns compiled by the Independent Electoral Commission (IEC) give the LCD about 61% of the popular vote, followed by the Basotho National Party (BNP), which won 25% and the lone seat of Bobatsi in Mokhotlong district. The Basotho Congress Party (BCP) took 11% of the vote but did not win any seats, perhaps signalling the demise of the party, which previously held 23 seats. Nine other parties shared the remaining 3% of the vote. Voter turnout was reported to be 75% of the registered electorate of about 1.3m people.

—renews the party’s Voters appear to have been persuaded in overwhelming numbers to return the mandate incumbent administration for a further five years in power. Several factors explain the lopsided outcome: the campaigning of the popular veteran party leader and former prime minister, Ntsu Mokhehle; the electorate’s desire for peace and continuity; and the continued strong performance of the economy which has brought increased incomes throughout the past decade. The LCD also benefited from access to additional resources and increased pre-election public spending. For example, civil servants were recently awarded a 10% salary increase and the Highland Water Development Fund was relaunched to provide additional resources for rural development (see below). Meanwhile, the opposition failed to capitalise on potential weaknesses in the LCD’s record— notably, its handling of the recent garment workers’ strike, when police fired live ammunition, resulting in one fatality and six serious injuries (2nd quarter 1998, page 27).

The opposition cries foul— Unsurprisingly, the opposition has not taken defeat quietly. There were protests and angry confrontations with IEC officials accused of complicity in the LCD victory. On May 18th, the eve of the polls, a number of parties launched an unsuccessful legal challenge to have the vote postponed, claiming they had not be given adequate time to inspect the final voter lists. Despite post-election threats by some parties, any sustained challenge to overturn all or part of the results is unlikely to succeed. (The BNP has declared that it will challenge the election result in Maama constituency in court.) There is also a slight chance that some disaffected elements within the opposition could become violent. Rumours were circulating in Lesotho both before and after the election that arms were being smuggled into the country.

—but election observers Few documented cases of fraud or mismanagement during the election itself give their qualified have emerged, the poll having been monitored by an estimated 180 observers approval representing international, regional and local interests. The observers con- cluded that the poll had some flaws, but was generally free and fair. This

appears to be a sufficiently positive report, and it is unlikely that any observing body will challenge the results or support opposition charges that a major miscarriage of justice has taken place. The Southern African Development Community (SADC) delegation’s statement was unambiguous in calling the election process “free, fair and transparent”, but comments by other groups were somewhat less clear, notably those of Lesotho-based non-governmental organisations, which expressed concern about the lack of secrecy under which polling took place in some locations. The observers noted no protests or vio- lence at any polling site visited.

Mr Mosisili faces problems There were early indications that, despite the LCD’s overwhelming victory, the in forming a cabinet prime minister was not going to have an easy time forming a government and asserting his leadership within the party. The major issue was how to accom- modate the aspirations of two other LCD figures, Kelebone Maope and Shakhane Mokhehle. Having rejected power-sharing proposals and having defeated Mr Maope in the leadership contest, Mr Mosisili has had to manage party personalities carefully. Mr Mokhehle, the younger brother of the former prime minister, Ntsu Mokhehle, did not mount a direct challenge for the leadership, but remains a powerful force in the party in his capacity as executive secretary. After intense negotiations and intervention by Ntsu Mokhehle, Mr Maope was named deputy prime minister and given the agriculture portfolio, while Shakhane Mokhehle was given the works and transport portfolio. The most important new entrant to the cabinet is Tom Thabane, the foreign affairs minister. Mr Thabane has extensive political experience and was Ntsu Mokhehle’s most prominent political adviser. Cabinet numbers remain unchanged at 16, with 10 ministers held over from the previous administration. The only significant surprises were the exclusion of the former trade minister, Lira Motete, who has been replaced by Mpho Malie, returning after a three-year absence from the cabinet.

The new Senate takes In mid-June King Letsie III nominated 11 members to join the 22 principal shape chiefs in the Senate, Lesotho’s upper house. As with the previous Senate, the appointments were used to bring opposition party members into the government. Although veteran politicians and leaders of small parties have traditionally been favoured, 6 out of the 11 nominated in June were not affiliated to any party. On June 16th the Senate’s former deputy president, Chief Sempe Lejaha, was elected to lead the upper house. Chief Lejaha polled 14 of the 23 votes cast to beat the incumbent, Thabo Ntlakana.

The deputy speaker Basotho women are becoming increasingly prominent in Lesotho public life. pushes for women’s rights Reflecting this trend, the National Assembly elected Ntlhoi Motsamai deputy speaker. There are currently three female MPs, including a cabinet minister, and three female members of the Senate. Mrs Motsamai made it clear in her accep- tance speech that she will speak out on the issue of women’s rights and the promotion of women into positions of responsibility in the National Assembly and elsewhere. The LCD publicly supports women’s rights, but has made no specific commitments to legal reform.

The government seeks Lesotho and South Africa have relaunched the Inter-Governmental Liaison closer ties with Committee to improve co-ordination of their crossborder effort to combat crime South Africa (2nd quarter 1998, page 28). A high-level meeting in Pretoria in April established nine subcommittees to enhance co-operation on health, education, transport, tourism, agriculture and justice issues. Such meetings set a framework for improved dialogue, but as yet there is little evidence that they have had any positive effect on tensions in the border areas. Clashes in early May left four people dead after a dispute over cattle thefts, and high-level delegations, led by the two countries’ respective foreign ministers, were dispatched to seek solutions. The medium- term outlook for relations between Lesotho and South Africa is, however, improving. South Africa provided extensive assistance to help Lesotho run its election, including the loan of three helicopters and a M1.4m ($240,000) grant for materials and supplies.

The economy

Growth levels outstrip According to a recent study by the Harvard-based economist Jeffrey Sachs, those of other African Lesotho registered the highest average real GDP growth per head among all countries— African countries in 1990-96. According to Mr Sachs, average annual GDP growth in Lesotho was 8.5% over the period, slightly higher than other estimates. By any measure, Lesotho’s recent growth rates have been impressive, with real GDP growth estimated by the EIU at 10.5% in 1997. The challenge for the new government is to sustain these high real growth rates in the face of declining remittances from migrant labour and rising unemployment.

—but weak gold prices With the price of gold dropping to under $300/oz, several South African mines affect income and have closed, including the Welkom goldfields, as a result of which 9,000 Basotho employment migrants were made redundant between November 1997 and March 1998. Total employment of Basotho migrant miners fell to about 91,000 at the end of 1997, of whom only 76,000 were working in the gold mines, where the highest average wages are to be earned. This represents a 22% drop in Basotho mining employment since 1993.

The Basotho migrant labour phenomenon, which has become deeply in- grained in the social and political life of Lesotho, is threatened by these recent developments. In this context, King Letsie III used the occasion of his address to the inaugural session of the new National Assembly on June 19th to draw attention to the urgent need to address the migrant problem. The king stressed the potential of Lesotho’s own mineral wealth and the capacity for further growth in manufacturing.

External partners show Soon after the successful inauguration of Phase 1A of the Highlands Water confidence in the Development Project (2nd quarter 1998, page 28), news emerged of the ap- Highlands Water scheme— proval in early June of a further $45m in financial assistance from the World Bank for Phase 1B. The Bank had come under pressure to reconsider its involve- ment in the scheme following reports of its likely negative social and environ- mental impact. Progress has been made in these areas, but more recently critics have claimed that lower-cost options are available to meet the area’s future water and power needs, and that Phase 2, which is scheduled to begin in 2003,

should be cancelled. The Bank and the Lesotho Highlands Development Authority (LHDA) have yet to respond. The reaction of the South African authorities will be a crucial factor in the outcome.

The Lesotho Highlands Water Development Project

The principal energy project in Lesotho is the five-phase Lesotho Highlands Water Development Project, a joint venture with South Africa dating back to 1986. The project will not only meet Lesotho’s water and electricity needs, but will export the majority of its output to South Africa. The project is supervised by a statutory body, the Lesotho Highlands Development Authority (LHDA), and is funded by a wide range of public and private investors. The project should create 3,700 jobs and improve rural infrastructure in the project area, and is already generating royalty payments from water sales.

• Phase 1A was completed at the end of 1996 at a cost of about $2.5bn. The centrepiece of 1A is the Katse dam, which at 185 metres is Africa’s highest dam. Phase 1A also includes a smaller dam, a 72-mw power plant at Muela and a 82-km tunnel system. The dam was filled in January 1997 and was officially opened in January 1998. Current water flow capacity is 18 cu metres per second.

• Phase 1B, which is expected to be completed in 2003 and to cost $1.1bn, includes the construction of the 145-metre-high Mohale dam, a smaller dam on the Matsoku River, and 40 km of interconnecting tunnels. With this phase, total water-flow capacity will rise to 30 cu metres per second.

• Phases 2-5, which are potentially subject to major revisions, are expected to be finished in 2020, increasing total water flow to 70 cu metres per second and total electricity output to 200 mw.

—with further progress on After the suspension of its activities last year because of controversy surround- the development fund ing its allocation practices, the Lesotho Highland Water Revenue Fund (LHWRF) is set to recommence operations. A workshop in mid-June involved most interested parties, and is expected to lead to a number of changes to improve accountability and give affected communities more of a say in projects. The LHWRF, which aims to invest in local community development projects, is financed out of revenue accruing from the sale of water to South Africa. The government has indicated that, since its inauguration in 1992, the fund has collected M335m ($57m) and has allocated about M152m ($26m) to 200 projects employing about 15,000 people. Revenue is expected to increase sharply, with Phase 1A fully operational since the beginning of 1997.

Banks are targeted in the Lesotho’s privatisation programme, under way since mid-1997, accelerated with privatisation programme— the announcement in early June by the director of privatisation in the Ministry of Finance, Mothusi Mashologu, that the Lesotho Agricultural Development Bank (LADB) and the Lesotho Bank, both of which are wholly state-owned, will be divested. Lesotho Bank has long enjoyed a dominant position in retail banking, but has come under considerable pressure from South African competition. A strategic partnership, along with the public flotation of shares, may be considered in order to raise capital and diversify operations. In contrast, the LADB is

reported to be in serious and immediate financial difficulties owing to loan arrears, and deposits may be in jeopardy. One option may be the absorption of at least some assets and liabilities by Lesotho Bank prior to flotation.

—as is the tourism sector Tourism has also been identified as a priority for privatisation and attracting private capital. An investment promotion conference was held in Maseru in late January to promote new opportunities, particularly eco-tourism and leisure ventures associated with the Highlands Water scheme. The government expects the Orange River Lodge in Quthing district to be sold to private Basotho investors shortly.

Hotel jobs linked to The recent dispute over gambling rights in Lesotho had threatened a number gambling are saved of jobs (2nd quarter 1998, page 30). In June the Lesotho High Court upheld an application by Lesotho Hotels International to have slot machines and other equipment returned to use. These had been seized by police at the beginning of 1998 in a crackdown on operations deemed not to hold licences. The decision will safeguard about 80 jobs.

Lesotho: external debt ($ m unless otherwise indicated; debt stocks as at year-end) 1994 1995 1996 Total external debt 603 659 654 Long-term debta 555 613 612 Short-term debt 8 8 9 of which: interest arrears on long-term debt 4 4 5 Use of IMF credit 40 38 34 Public & publicly guaranteed long-term debta 555 613 612 Official creditors 538 584 578 Multilateral 424 460 466 Bilateral 114 124 112 Private creditors 17 28 34 of which: commercial banks 3 15 23 Total debt service 29 40 36 Ratios Total external debt/GNP 55.0 52.7 53.0 Debt-service ratiob 5.3 6.9 6.1 Short-term debt/total external debt 1.3 1.3 1.3 Concessional long-term loans/long-term debta 77.7 75.1 74.4 Variable interest long-term debt/long-term loansa 7.5 8.8 9.3

a Long-term debt is defined as having an original maturity of more than one year. b Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance, 1998.

Growth in foreign debt The latest edition of the World Bank’s Global Development Finance points to a slowed in 1996— marked slowdown in the growth of Lesotho’s foreign debt stock in 1996 and a consequent improvement in its main debt ratios. Total external debt stood at $654m at the end of 1996, of which $612m was accounted for by long-term debt. This represents a marginal decrease from 1995. The external debt/GNP

ratio remained relatively high at 53%, slightly lower than its peak of 55% in 1994, but higher than the 38% recorded in 1990. The external debt-service ratio, meanwhile, fell to 6.1% from 6.9% in 1995. The ratio of concessional debt to long-term debt continues to drop, reflecting a hardening of terms and the increasing amount of private debt passing through the banking system.

—and official Recent data from the OECD point to a decline in receipts of official development development assistance fell assistance (ODA) in 1996 to about $107m, the lowest recorded figure since 1990. Of the total, about 73% was in the form of grants. The drop reflects both general aid fatigue among the international donor community and the decline in a number of specific programmes for Lesotho. The trend may not be reversed in the short to medium term—data on commitments suggest that further falls in disbursements are likely in coming years.

The proportion of assistance emanating from multilateral sources has continued to grow in the 1990s, and reached 51% in 1996. The main multilateral sources are the EU (42%), the African Development Bank (18%) and the World Bank’s International Development Association (19%). Germany, Ireland, the UK and Japan are the largest bilateral donors, with assistance from Sweden and the US falling sharply in 1996. Development assistance per head was $53 in 1996 compared with $76 in 1992. In May the British government announced a development grant of M22.6m ($3.9m) to Lesotho covering new bilateral development programmes in road construction, governance and education, and a grant to assist small-scale garment production.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 31

Quarterly indicators and trade data

Botswana: quarterly indicators of economic activity

1996 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Monthly av Consumer prices: 1990=100 192.6 197.7 202.6 205.6 210.2 216.1 223.9 222.5 225.4 230.2a change year on year % 10.4 10.3 10.0 9.7 9.1 9.3 10.5 8.2 7.2 n/a Money End-Qtr M1, seasonally adj: P m 853 883 959 959 1,036 1,068 1,034 1,044 1,284 n/a change year on year % 11.5 14.1 18.4 14.4 21.5 21.0 7.8 8.9 23.9 n/a Foreign trade Qtrly totals Exports fob P m 2,201.1 2,700.8 2,884.8 2,952.8 2,326.1 2,447.0 2,940.0 2,720.0 n/a n/a Imports cif “ 1,216.0 1,320.0 1,465.8 1,736.7 1,513.9 2,205.5 2,243.6 2,287.2 n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 4,648 4,724 4,903 5,028 5,310 5,490 5,665 5,675 5,907 n/a Exchange rate Market rate P:$ 3.066 3.370 3.519 3.644 3.542 3.593 3.698 3.810 3.905 3.983b

Note. Annual figures for most of the series shown above will be found in the Country Profile. a Average for April-May. b End-May.

Source: IMF, International Financial Statistics.

Lesotho: quarterly indicators of economic activity

1995 1996 1997 1998 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Monthly av Consumer prices: 1990=100 190.7 194.4 200.2 204.1 208.3 211.7 217.8 n/a n/a n/a change year on year % 8.5 9.7 9.9 8.5 9.2 8.9 8.8 n/a n/a n/a Money End-Qtr M1, seasonally adj: M m 506.5 507.4 559.9 579.6 615.6 636.3 662.7 725.8 740.9 821.0 change year on year % 6.9 –0.8 18.8 19.9 21.5 25.4 18.4 25.2 20.4 29.2 Foreign trade Qtrly totals Exports fob M m 167.0 130.0 215.0 230.0 237.0 172.0 n/a n/a n/a n/a Imports cif “ 1,027.0 930.0 987.0 1,112.0 1,273.0 1,071.0 n/a n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 451.2 447.8 423.1 428.3 454.1 517.5 542.4 568.7 565.8 598.7 Exchange rate Market rate M:$ 3.648 3.981 4.334 4.530 4.683 4.423 4.531 4.662 4.868 5.035a

Note. Annual figures for most of the series shown above will be found in the Country Profile. a End-May, 5.158.

Source: IMF, International Financial Statistics.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 32 Quarterly indicators and trade data

Botswana and Lesotho: UK trade (£ ’000) Botswana Lesotho Jan-Mar Jan-Mar Jan-Mar Jan-Mar 1997 1998 1997 1998 UK exports fob Food, drink & tobacco 49 8 0 0 Chemicals 72 56 8 9 Textile yarn, fabrics & manufactures 415 772 0 0 Non-metallic mineral manufactures 643 761 0 0 Iron & steel 2 161 0 0 Metal manufactures 95 13 3 7 Machinery incl electric 431 860 1,427 234 Transport equipment 178 594 0 23 Clothing 5 149 0 37 Scientific instruments etc 208 182 64 5 Total incl others 2,871 4,880 1,634 354 UK imports cif Meat & preparations 1,006 3,217 0 0 Machinery & transport equipment 1,199 17 0 1 Clothing 451 278 90 0 Total incl others 2,741 3,835 90 1 Source: UK HM Customs & Excise, Business Monitor, MM20.